Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.

The seller sells the goods and generates invoice for the same. The seller then sells all the generated invoices to the third party called Factor. The reason behind the same is immediate money. Factor pays the money to the seller after deducting some discount and then itself collects the payments from the debtors. In this way, seller gets immediate money and the burden of collecting money from debtors is also transferred to the Factor.